Treasuries gain for second day as U.S. spending reductions loom

The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, reached negative 0.75 percent today, the most costly level since Jan. 23. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Treasury market volatility, as measured by the Bank of America Merrill Lynch MOVE index, declined yesterday to 55.9, the lowest since Jan. 24.

Treasury trading volume dropped yesterday to $286 billion, the lowest level since Feb. 22, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. Daily volume reached $491 billion on Feb. 1, the highest since August 2011. The average daily volume for 2013 is $302 billion, compared with $238 billion in 2012.

Congress mandated $1.2 trillion in across-the-board spending cuts to begin today and be spread over nine years, as part of a 2011 agreement to increase the U.S. debt limit. Reductions totaling $85 billion are scheduled to take effect in the remaining seven months of this fiscal year. Lawmakers have failed to reach an accord to head them off.

‘Grind Higher’

“No one knows how much time we have in terms of the resolution of this,” said Sean Murphy, a trader at Societe Generale in New York, a primary dealer. “We have the potential to grind higher in prices with these concerns. There may be another 10 basis points of steam left.”

Obama said it may take weeks to win over enough lawmakers from both parties to reach a deal on a replacement deficit- cutting plan. He said agreement will be reached once members of Congress hear from voters feeling the pinch of cutbacks in government programs.

Bernanke signaled in congressional testimony this week the Fed is prepared to keep buying bonds at its present pace, as he dismissed concern that record easing risks sparking inflation or asset-price bubbles. The central bank purchases $85 billion of Treasury and mortgage debt a month, putting downward pressure on borrowing costs to fuel growth.

Fed Purchase

The Fed bought $916 million of Treasuries today maturing from August 2023 to February 2031.

China’s official purchasing managers’ index was 50.1 in February, the weakest in five months and down from 50.4 in January, a report from the National Bureau of Statistics and China Federation of Logistics and Purchasing showed in Beijing. The euro area’s annual inflation rate fell more than economists predicted in February, to 1.8 percent, according to the European Union’s statistics office in Luxembourg.

Italy’s 10-year yield rose six basis points to 4.79 percent today. The Standard & Poor’s 500 Index fell as much as 0.9 percent and gained as much as 0.4 percent.